Basics of investment management: the 11 asset classes, in plain words
Most people meet investing through products: a fund a coworker likes, a stock in the news, a CD at the bank. We think it is easier to start one level up. An asset class is a group of investments that behave alike because they pay you for the same kind of risk. Stocks pay you for owning a share of business profits. Bonds pay you for lending. Cash pays you for waiting. Once you know what each class is for, a new product becomes easy to place: you ask which class it belongs to and what job it does next to the others. This tutorial walks through the 11 classes we use when we think about a portfolio. It is written for anyone, with no finance background assumed, and every number carries its source.
What investment management means
Investment management is the work of matching money to a purpose and keeping it matched as life and markets change. It begins with goals. A down payment in three years, a child's tuition in twelve and retirement in thirty are different problems, even when the same person owns all three.
Time horizon. How long until you need the money decides how much short-term loss you can live with. Money needed next year has no time to recover from a bad market. Money needed in twenty years usually does, which is why long horizons can hold more stocks.
Risk. In this tutorial, risk means two things: how much an investment swings from year to year, and how deep and long its worst losses have been. A second kind of risk gets less attention. Holding only very safe assets can leave you short of a goal because inflation erodes what the money buys.
Diversification. Different classes react to different shocks. When stocks fell hard in 2008, high-quality government bonds rose. Owning several classes will not prevent losses, yet it tends to make the worst years less severe than owning one class alone.
Costs. Fees and taxes come out every year, in good markets and bad. A fund that charges 1 percent a year takes about a quarter of the gains on an investment earning 4 percent. Low-cost index funds and attention to which account holds which asset are two of the few things an investor fully controls.
Rebalancing. Over time the classes drift. If stocks have a strong run, a 60/40 mix of stocks and bonds can become 70/30 without anyone deciding it. Rebalancing means selling some of what has grown and buying what has lagged, to bring the mix back to the plan you chose. Many people do it once a year or when a class moves more than a set amount away from its target.
How to read the numbers here
We give each class a short table. Where a figure appears, we name who measured it and over what years. Long-run returns are averages over decades, and any single decade can look very different. A "worst calendar year" is the largest one-year loss in the named series, which is a useful sense of what a bad year can feel like.
Volatility is the standard deviation of yearly returns. As a rough guide, a class with a standard deviation of 20 percent will land within 20 points of its average in about two years out of three, and outside that band in the third. When we could not find a published figure we trust, we describe the class in words ("low", "medium", "high") and list the gap at the end. Past returns do not predict future ones; they show what kind of ride each class has given.
1. US stocks
What it is. A share of stock is a slice of ownership in a company. US stocks as a class means the whole domestic market, from the largest companies in the S&P 500 down to small firms.
Its job in a portfolio. Growth over long periods. Stocks have given the highest long-run returns of the classes in this tutorial, and that return is the reward for sitting through deep, sometimes long, losses.
Main risks. Large drops in recessions and crises, and long flat stretches. The S&P 500 ended 2009 below its level at the end of 1999, even with dividends counted (S&P Dow Jones Indices). Single companies can go to zero, which is why most people own the market through a fund.
What history shows. The SBBI yearbook (Stocks, Bonds, Bills, and Inflation, the series Roger Ibbotson and Rex Sinquefield started and Kroll now publishes) puts large US company stocks at about 10 percent a year compounded from 1926 through 2023, with a standard deviation near 20 percent. Its worst calendar year was 1931, at about minus 43 percent. In 2008 the S&P 500 returned about minus 37 percent including dividends (S&P Dow Jones Indices).
How people hold it. Most investors use a total-market or S&P 500 index fund or ETF; VTI and VOO are two common examples, named only so the type is clear. Some hold individual stocks, or use direct indexing in a separately managed account to harvest tax losses.
| US stocks | Figure and source |
|---|---|
| Long-run return | About 10% a year compounded, large companies, 1926 to 2023 (SBBI) |
| Worst calendar year | 1931, about -43% (SBBI); 2008, about -37% (S&P 500 total return) |
| Volatility band | High: standard deviation near 20% a year (SBBI) |
| Who tends to hold it | Long-horizon savers, retirement accounts, nearly every diversified portfolio |
Deeper: what moves US stocks, with one worked example per driver →
2. International developed-market stocks
What it is. Shares of companies listed in wealthy economies outside the US: Japan, the UK, the euro area, Switzerland, Canada, Australia and others. The MSCI EAFE index (Europe, Australasia and the Far East) is the usual yardstick.
Its job in a portfolio. Spreading company risk beyond one country. US and foreign markets take turns leading, sometimes for a decade at a time, and a US investor holding both gets less dependent on one economy, one currency and one set of tax and policy choices.
Main risks. Everything that hits US stocks, plus currency moves. When the dollar strengthens, foreign gains shrink once converted back to dollars; when it weakens, they grow. Some markets carry heavy weights in a few industries, such as banks in Europe.
What history shows. Dimson, Marsh and Staunton, whose data appear each year in the UBS Global Investment Returns Yearbook, estimate that world stocks as a whole returned about 5 percent a year above inflation from 1900 onward, with the US above that average and many other markets below it. MSCI EAFE lost about 43 percent in US dollars in 2008 (MSCI index data).
How people hold it. Broad international index funds and ETFs are the common route (VEA and IEFA are examples of the type). Some funds hedge the currency back to dollars; most broad ones do not.
| International developed stocks | Figure and source |
|---|---|
| Long-run return | World stocks about 5% a year above inflation since 1900; non-US markets mostly below the US (Dimson, Marsh and Staunton) |
| Worst calendar year | 2008, about -43% in US dollars (MSCI EAFE) |
| Volatility band | High, similar to US stocks, with currency swings added |
| Who tends to hold it | Diversified long-term investors, as part of their stock holdings |
Deeper: what moves International developed-market stocks, with one worked example per driver →
3. Emerging-market stocks
What it is. Shares of companies in faster-growing, less wealthy economies: China, India, Taiwan, Korea, Brazil, Mexico, South Africa and others. MSCI began its Emerging Markets index in 1988.
Its job in a portfolio. A small slice that reaches parts of the world economy where growth has been fastest. Economic growth and stock returns do not move one for one, so the reason to hold emerging markets is diversification more than a bet on GDP.
Main risks. Bigger swings than developed markets, political and legal risk, capital controls, sharp currency falls and heavy concentration in a handful of large companies and countries. Some markets limit what foreign investors may own.
What history shows. The MSCI Emerging Markets index lost about 53 percent in US dollars in 2008 (MSCI index data), one of the deepest one-year falls among the classes here. We did not find a single long-run return figure we were comfortable quoting for the whole class, so we leave it in words: higher swings than developed markets, with long periods both ahead of them and behind them.
How people hold it. Broad emerging-market index funds and ETFs (VWO and IEMG are examples of the type), or a total-international fund that already includes them.
| Emerging-market stocks | Figure and source |
|---|---|
| Long-run return | Not quoted; long stretches above and below developed markets (see the gap list) |
| Worst calendar year | 2008, about -53% in US dollars (MSCI Emerging Markets) |
| Volatility band | Very high: above developed-market stocks |
| Who tends to hold it | Long-horizon investors, usually as a modest part of the stock allocation |
Deeper: what moves Emerging-market stocks, with one worked example per driver →
4. US bonds
What it is. A bond is a loan. You lend money to the US Treasury, a government agency or a company, and in return you get regular interest and your principal back at maturity. The Bloomberg US Aggregate index, which tracks Treasuries, mortgage-backed bonds and investment-grade corporate bonds, is the usual benchmark for the class.
Its job in a portfolio. Steady income and a cushion when stocks fall. In most stock market crises since the 1980s, high-quality bonds held their value or rose. Bonds also give a predictable source of money for spending in the next few years.
Main risks. Rising interest rates push bond prices down, and longer bonds fall more. Inflation eats into fixed interest payments. Corporate bonds add default risk, the chance a borrower stops paying. 2022 showed all of this at once: inflation and rate rises sank stocks and bonds together.
What history shows. SBBI puts long-term US government bonds at about 5 percent a year compounded from 1926 through 2023, with far smaller swings than stocks. The 10-year Treasury yield (Federal Reserve FRED series DGS10) ran from above 15 percent in 1981 to about 0.5 percent in 2020. The Bloomberg US Aggregate index lost about 13 percent in 2022, its worst calendar year since the index began in 1976.
How people hold it. Total bond market funds and ETFs (BND and AGG are examples of the type), Treasury bonds bought directly at TreasuryDirect or through a broker, bond ladders and certificates of deposit for the shortest end.
| US bonds | Figure and source |
|---|---|
| Long-run return | About 5% a year compounded, long-term government bonds, 1926 to 2023 (SBBI) |
| Worst calendar year | 2022, about -13% (Bloomberg US Aggregate) |
| Volatility band | Low to medium: well below stocks, higher for long maturities |
| Who tends to hold it | Almost everyone with a near-term spending need, retirees, balanced portfolios |
Deeper: what moves US bonds, with one worked example per driver →
5. Municipal bonds
What it is. Loans to US states, cities, school districts, hospitals and public utilities. Interest on most municipal bonds is free of federal income tax, and often of state tax when you live in the issuing state.
Its job in a portfolio. Tax-efficient income for investors in higher tax brackets, held in a taxable account. A useful check is the taxable-equivalent yield: divide the muni yield by one minus your tax rate. A 3 percent tax-free yield equals about 4.6 percent taxable for someone in the 35 percent bracket.
Main risks. The same interest-rate risk as other bonds, plus credit risk that varies widely from one issuer to the next. Defaults have been rare among highly rated issuers, but they do happen; Detroit in 2013 and Puerto Rico's debt crisis are the best-known cases. Some munis trade rarely, so prices can be hard to see.
What history shows. The Bloomberg Municipal Bond index lost about 8.5 percent in 2022, its worst calendar year in recent decades. Before tax, munis have usually yielded less than Treasuries and corporate bonds of similar maturity, which is the cost of the tax exemption.
How people hold it. National muni funds and ETFs (MUB and VTEB are examples of the type), single-state funds for residents of high-tax states, or individual bonds in a ladder through a broker or separately managed account. Munis rarely belong in an IRA or 401(k), where the tax break does nothing.
| Municipal bonds | Figure and source |
|---|---|
| Long-run return | Usually below taxable bonds before tax, often higher after tax for high brackets (no long-run figure quoted) |
| Worst calendar year | 2022, about -8.5% (Bloomberg Municipal Bond index) |
| Volatility band | Low to medium, similar to taxable bonds of the same maturity |
| Who tends to hold it | Higher-bracket investors with taxable accounts |
Deeper: what moves Municipal bonds, with one worked example per driver →
6. Treasury inflation-protected securities (TIPS)
What it is. US Treasury bonds whose principal rises with the Consumer Price Index. The Treasury first issued TIPS in January 1997. You receive a fixed "real" interest rate on a principal that grows with inflation, so the payments keep their buying power.
Its job in a portfolio. Insurance against an inflation surprise, backed by the US government. Ordinary bonds lose buying power when inflation jumps; TIPS adjust.
Main risks. TIPS still lose value when real interest rates rise. The 10-year TIPS real yield (FRED series DFII10) went from below zero in 2020 and 2021 to around 2 percent in 2023, and TIPS prices fell sharply along the way. In taxable accounts, the yearly inflation adjustment is taxed as income even though you receive it only at maturity, so many people hold TIPS in retirement accounts.
What history shows. The Bloomberg US TIPS index lost about 12 percent in 2022, a year of high inflation, because real rates rose faster than inflation added. The series is short, since TIPS date only from 1997, so we do not quote a long-run average.
How people hold it. TIPS funds and ETFs (TIP and SCHP are examples of the type), individual TIPS bought at auction or through a broker, often in a ladder matched to future spending. I Bonds, bought directly from the Treasury, are a related product with purchase limits.
| TIPS | Figure and source |
|---|---|
| Long-run return | Too short a history for a long-run figure; the 10-year real yield ran from below 0% (2020 to 2021) to about 2% (2023) (FRED DFII10) |
| Worst calendar year | 2022, about -12% (Bloomberg US TIPS index) |
| Volatility band | Low to medium; long maturities swing more |
| Who tends to hold it | Retirees and near-retirees who want spending protected from inflation |
Deeper: what moves TIPS, with one worked example per driver →
7. Real estate (REITs)
What it is. Real estate investment trusts own and run income property: apartments, warehouses, offices, data centers, cell towers, shopping centers. A REIT must pay out most of its taxable income as dividends, and most trade on stock exchanges like any company.
Its job in a portfolio. Exposure to property income and rents without buying a building. Rents tend to rise with inflation over long periods, and REIT dividends give a steady stream of cash.
Main risks. Listed REITs behave like stocks in a crash, and they react to interest rates because they borrow heavily and compete with bonds for income-seeking buyers. Sector problems hit hard: offices after 2020, malls before that. REIT dividends are mostly taxed as ordinary income.
What history shows. Nareit has tracked US equity REITs since 1972 in the FTSE Nareit All Equity REITs index. That index lost about 38 percent in 2008. Over its full history, Nareit's data show returns in the same broad range as US stocks, with similar or larger swings; we do not quote a single average because it moves a good deal with the end date chosen.
How people hold it. REIT index funds and ETFs (VNQ is an example of the type), individual REITs, or direct ownership of rental property, which brings management work, concentration and leverage that a fund avoids. Non-traded REITs exist too; they are hard to sell and often carry high fees.
| Real estate (REITs) | Figure and source |
|---|---|
| Long-run return | Broadly similar to US stocks since 1972 (FTSE Nareit All Equity REITs); no single figure quoted |
| Worst calendar year | 2008, about -38% (FTSE Nareit All Equity REITs) |
| Volatility band | High, like stocks |
| Who tends to hold it | Diversified investors as a slice of their stocks; income seekers in tax-deferred accounts |
Deeper: what moves Real estate (REITs), with one worked example per driver →
8. Commodities
What it is. Raw materials: oil, natural gas, industrial metals, grains, livestock. Investors almost never hold the barrels or bushels. They hold futures contracts, agreements to buy at a set price on a future date, and roll them forward as they expire.
Its job in a portfolio. A hedge against inflation driven by supply shocks, and returns that often move differently from stocks and bonds. Gary Gorton and Geert Rouwenhorst, in "Facts and Fantasies about Commodity Futures" (Financial Analysts Journal, 2006), found that a diversified basket of collateralized commodity futures from 1959 to 2004 earned returns similar to stocks, with low or negative correlation to stocks and bonds.
Main risks. Very large swings, long losing stretches and the cost of rolling futures when later contracts trade above near ones. Results depend heavily on how a fund chooses and rolls its contracts. Commodities pay no interest or dividends of their own; the return comes from price changes, the roll and the interest on cash held as collateral.
What history shows. The Bloomberg Commodity index lost about 36 percent in 2008. Results since the Gorton and Rouwenhorst study have been much weaker than their 1959 to 2004 sample, with long losing periods in the 2010s, so we quote no long-run average.
How people hold it. Broad commodity index funds and ETFs that hold futures, often organized as partnerships that issue a K-1 tax form, or "no K-1" versions that use an offshore subsidiary. Stocks of energy and mining companies are a different, indirect route.
| Commodities | Figure and source |
|---|---|
| Long-run return | Similar to stocks from 1959 to 2004 (Gorton and Rouwenhorst, 2006); much weaker since; no current long-run figure quoted |
| Worst calendar year | 2008, about -36% (Bloomberg Commodity index) |
| Volatility band | High |
| Who tends to hold it | Investors seeking an inflation hedge, usually as a small slice |
Deeper: what moves Commodities, with one worked example per driver →
9. Gold
What it is. The metal itself, valued by the LBMA gold price set twice daily in London. Gold has no earnings and pays no income. Its value comes from its long history as a store of value, central bank demand, jewelry and industrial use.
Its job in a portfolio. A hedge against crises, currency debasement and loss of confidence in governments. Gold has often held up or risen when stocks fell sharply, though not every time.
Main risks. No income to wait on, and long, deep slumps. After the US ended dollar convertibility to gold in 1971, the price climbed to about $850 an ounce in January 1980, then spent roughly two decades falling and finished the 1990s under $300 (LBMA). Holding gold also costs money in storage, insurance or fund fees.
What history shows. The LBMA price fell about 28 percent in 2013, the largest calendar-year fall since 1981. We give no long-run average, because gold's return depends heavily on the start and end years chosen.
How people hold it. Physically backed gold ETFs (GLD and IAU are examples of the type), coins and bars kept in a safe deposit box or vault, or shares of gold mining companies, which behave more like stocks.
| Gold | Figure and source |
|---|---|
| Long-run return | Not quoted; depends heavily on dates. About $850 an ounce in January 1980, under $300 by 1999 (LBMA) |
| Worst calendar year | 2013, about -28% (LBMA gold price) |
| Volatility band | Medium to high |
| Who tends to hold it | Investors wanting crisis insurance, usually as a small slice |
Deeper: what moves Gold, with one worked example per driver →
10. Currencies
What it is. Exchange rates between currencies. A US investor meets this class whenever they own something priced in euros, yen or pounds. A few investors hold currencies on purpose, through currency funds, foreign cash deposits or futures.
Its job in a portfolio. For most people, currency is a side effect to understand. International stock funds carry foreign currency exposure unless they hedge it. Some investors hold a basket of foreign currencies as a hedge against a falling dollar; others hedge to keep foreign bond returns stable, because currency swings can be bigger than a bond's own price changes.
Main risks. Currencies move on interest rates, trade, inflation and politics, and they can trend for years. The dollar rose so far in the early 1980s that the major economies agreed in the 1985 Plaza Accord to push it down. Currency strategies that earn the interest gap between countries tend to lose suddenly in a panic.
What history shows. The Federal Reserve publishes a trade-weighted dollar index (FRED series DTWEXBGS, the nominal broad dollar index). We did not find a long-run return or volatility figure for "currencies as an asset class" that we wanted to quote, so the table stays in words.
How people hold it. Indirectly, through international stock and bond funds, hedged or unhedged. Directly, through currency ETFs, foreign currency bank accounts or futures, which most individual investors do not need.
| Currencies | Figure and source |
|---|---|
| Long-run return | Not quoted (see the gap list) |
| Worst calendar year | Not quoted; depends on the currency pair |
| Volatility band | Medium; major currencies swing less than stocks |
| Who tends to hold it | Mostly indirect, through international funds; directly by a few specialists |
Deeper: what moves Currencies, with one worked example per driver →
11. Cash and Treasury bills
What it is. Money you can reach right away with almost no risk of loss: bank savings and checking, money market funds, and Treasury bills, US government loans that mature in a year or less.
Its job in a portfolio. Spending money for the next months, an emergency fund and dry powder for rebalancing after a market fall. It keeps a bad market from forcing you to sell stocks at a low point.
Main risks. Inflation. Cash rarely loses dollars, but it can lose buying power fast. In 1946 consumer prices rose about 18 percent (Bureau of Labor Statistics) while Treasury bills paid well under 1 percent. Short rates also move: the 3-month Treasury bill rate (FRED series TB3MS) stayed near zero from 2009 to 2015 and again in 2020 and 2021, and then rose to around 5 percent in 2023.
What history shows. SBBI puts 30-day Treasury bills at about 3.3 percent a year compounded from 1926 through 2023, against inflation of about 3 percent, leaving a real return close to zero. Dimson, Marsh and Staunton report a similar pattern across countries since 1900: bills barely beat inflation over the long run. T-bills have had almost no losing calendar years in nominal terms.
How people hold it. High-yield savings accounts, money market funds, Treasury bills bought at auction or through a broker, and CDs. FDIC insurance covers bank deposits up to its limits; money market funds are not bank deposits.
| Cash and T-bills | Figure and source |
|---|---|
| Long-run return | About 3.3% a year compounded, close to zero after inflation, 1926 to 2023 (SBBI) |
| Worst calendar year | Almost never negative in nominal terms (SBBI); about -15% after inflation in 1946, when CPI rose about 18% (BLS) |
| Volatility band | Very low |
| Who tends to hold it | Everyone, for spending needs and emergencies |
Deeper: what moves Cash and Treasury bills, with one worked example per driver →
How the classes fit together
A portfolio picks a few of these classes and sets a weight for each, based on goals, horizon and comfort with loss. Stocks of all three kinds provide growth. Bonds, munis and TIPS steady the ride and fund nearer spending. Real estate, commodities and gold add exposures that sometimes move on their own. Cash covers the next year or so. Currencies come along with any foreign holding, and the choice to hedge them or not is a decision of its own.
Many long-term investors build most of a portfolio from four or five broad, low-cost funds and leave the smaller classes out entirely. That can work well. Adding a class makes sense when it does a job the others do not, and when you are prepared to hold it through its bad years. We find the summary table below a good place to begin that conversation.
| Class | Main job | Long-run return (source) | Risk band | How people usually hold it |
|---|---|---|---|---|
| US stocks | Growth | About 10% a year, 1926 to 2023 (SBBI) | High | Index funds and ETFs |
| International developed stocks | Growth, spread beyond the US | About 5% above inflation for world stocks since 1900 (DMS) | High | Index funds and ETFs |
| Emerging-market stocks | Growth, wider reach | Not quoted | Very high | Index funds and ETFs |
| US bonds | Income, cushion | About 5% a year, long-term government, 1926 to 2023 (SBBI) | Low to medium | Bond funds, Treasuries, ladders |
| Municipal bonds | Tax-free income | Below taxable bonds before tax | Low to medium | Muni funds, individual bonds |
| TIPS | Inflation protection | Short history; not quoted | Low to medium | TIPS funds, individual TIPS |
| Real estate (REITs) | Property income | Broadly like stocks since 1972 (Nareit) | High | REIT funds |
| Commodities | Supply-shock hedge | Like stocks 1959 to 2004, weaker since (Gorton and Rouwenhorst) | High | Futures-based funds |
| Gold | Crisis hedge | Not quoted; depends on dates | Medium to high | Gold ETFs, coins and bars |
| Currencies | Comes with foreign holdings | Not quoted | Medium | Through international funds |
| Cash and T-bills | Spending, emergencies | About 3.3% a year, near zero after inflation (SBBI) | Very low | Savings, money market funds, T-bills |
What this tutorial is not
This page explains how asset classes work in general. It does not say what you should own, and it does not know your goals, taxes or timeline. Fund names and tickers appear only as examples of a type, and naming one does not mean we recommend it. For a plan of your own, talk with a qualified professional who knows your full situation.
Sources
Kroll, Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook, 2024 edition, data 1926 to 2023 (the series begun by Roger Ibbotson and Rex Sinquefield).
Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists (Princeton University Press, 2002), and the UBS Global Investment Returns Yearbook, annual editions.
Federal Reserve Bank of St. Louis, FRED: series DGS10 (10-year Treasury yield), DFII10 (10-year TIPS real yield), TB3MS (3-month Treasury bill rate) and DTWEXBGS (nominal broad dollar index).
US Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers.
S&P Dow Jones Indices, S&P 500 total returns. MSCI, EAFE and Emerging Markets index data in US dollars. Bloomberg US Aggregate, Municipal Bond, US TIPS and Commodity index data.
Nareit, FTSE Nareit All Equity REITs index, data from 1972.
Gary Gorton and K. Geert Rouwenhorst, "Facts and Fantasies about Commodity Futures," Financial Analysts Journal 62, no. 2 (2006).
LBMA gold price, historical series.
What we left in words
We quote a number only where a named source publishes it. These stayed qualitative, and we will add figures when we have a source we trust: the long-run return of emerging-market stocks; the long-run averages for municipal bonds, TIPS, REITs, commodities after 2004 and gold; the volatility bands for every class except US stocks (taken from SBBI); and any return or worst-year figure for currencies. The worst-year figures for the index series cover each index's own history, which for several classes starts in the 1970s or later.
Educational only. Not investment, tax, or legal advice, and not an offer of advisory services. InnovationStrat Wealth, LLC is not yet registered as an investment adviser.